Amended proposal for a EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE ON INVESTOR COMPENSATION SCHEMES
Date: 1994-12-13
Institutions: European Commission
Subjects: banking, branch, credit guarantee, investment aid, investment loan, investment protection

COMMISSION  OF  THE  EUROPEAN  COMMUNITIES 

COM(94) 585 final - COD 471 

Brussels,  13.12.1994 

Amended proposal  for a 

EUROPEAN PARLIAMENT AND COUNCIL  DIRECTIVE 

ON INVESTOR COMPENSATION  SCHEMES 

(presented by the Commission pursuant to Article  189 a  (2) 
of the  EC-Treaty) 

EXPLANATORY  MEMORANDUM 

1. 

BACKGROUND 

On  22  September  1993 the Commission  adopted  a proposal  for  a Council  Directive 

on  investor  compensation  schemes.1  This was sent to the  Council  by  letter dated  22 

October 1993. 

The  Council  subsequently  forwarded  this  text  to  Parliament  and  to  the  Economic 

and  Social  Committee  and  in  January  1994  began  its  own  examination  of  the 

proposal. 

2. 

OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE 

The  Economic  and  Social  Committee  unanimously  adopted  an  opinion  on  the 

Commission proposal at its 312th Plenary  Session on 26 January  1994.2 

This  opinion,  while  advocating  a  number  of  technical  amendments  was  basically 

supportive  of the Commission proposal. 

A  number  of the  Committee's  suggestions  have  been  incorporated  in  this  amended 

proposal. 

1  COM(93)381  final-SYN  471, OJ No C 321, 27.11.1993, p. 15. 

2 

<1 

3. 

OPINION OF THE EUROPEAN PARLIAMENT 

The  European  Parliament  adopted  the  legislative  resolution  embodying  its  opinion 

on the Commission proposal  for a Council Directive at its sitting on  19 April  1994.3 

Parliament's 

largely 

favourable  opinion  contained  seven  amendments.  The 

Commission  accepted  three  of  these  (Nos  1, 3  and  7)  as  proposed  by  Parliament. 

The Commission  accepted the spirit of a further  three amendments (Nos 4, 5 and 6). 

Only  amendment  No  2  (relating  to the  definition  of  "investor"  in  Article  1(4))  was 

rejected  by  the  Commission  since  it  abandoned  the  concept  of  "investment 

business", which the Commission considers to be a crucial element in its proposal. 

4. 

ALIGNMENT ON THE DIRECTIVE ON DEPOSIT GUARANTEE SCHEMES 

On  30  May  1994  Parliament  and  the  Council  adopted  Directive  94/19/EC  on 

deposit-guarantee  schemes.4 

This measure  was thus  one  of  the  first  to  be adopted jointly  by the two  institutions 

under the codecision procedure of Article  189b of the Treaty. 

Indeed  the full  procedure provided  for  in the codecision  arrangements  was used, the 

final joint text being agreed in the Conciliation  Committee. 

Accordingly  it  is  an  important  consideration  that  Directive  94/19/EC  of  30  May 

1994  on  deposit-guarantee  schemes  represents  a jointly  agreed  view  of  Parliament 

and  the  Council  on  a  number  of  technical  issues  that  arise  in  identical  or  similar 

terms in the work on investor-compensation  schemes. 

From  the  start  of  its  work  on  investor  compensation  schemes  the  Commission  had 

recognized  that  there  was  a  link  with  the  parallel  but  more  advanced  work  in  the 

4  OJ No L  135, 31.5.1994,  p. 5. 

area  of  bank  deposit-guarantee  schemes  (see  Point  A.5  of  the  Explanatory 

Memorandum  of the initial proposal on investor compensation  schemes). 

Both  Parliament  and  the  Economic  and  Social  Committee  clearly  recognized  the 

need  for coherence and consistency  in the approach to these parallel areas of work. 

In  point  3.3  of  its  opinion  the  Committee  stated  that  "it  is  essential  that  these  two 

texts be entirely mutually  coherent". 

Parliament's  opinion  accepts  that  "the  proposal  must,  in  the  interests  of  legislative 

coherence,  be viewed  in the context  of other  Community  proposals  in  the  financial 

services  sector.  In  particular  the  proposal  must  be  read  in  conjunction  with  the 

Commission  proposal 

for  a  directive  on  deposit-guarantee 

schemes 

...". 

(Explanatory  statement, point 2, second paragraph). 

Accordingly,  a  number  of  provisions  in  the  amended  proposal  on  investor 

compensation  schemes  have  in the  interests  of  legislative  consistency  been  fully  or 

partially  aligned  on  or  made  consistent  with  the  corresponding  provisions  of  the 

bank deposit-guarantee  Directive 94/19/EC. 

Although  this  alignment  has  led  to  a  certain  re-ordering  and  reorganization  of  the 

provisions  of  this  proposal  and  a  considerable  amount  of  redrafting  it  must  be 

stressed  that the changes to the basic principles underlying  the Commission's  initial 

proposal  are not substantial. 

Because  of this  extensive  redrafting  the  full  text  of the  amended  proposal  is set  out 

in this  communication. 

5. 

COMMENTS  ON  AMENDMENTS 

Title and  citations 

A  number  of  changes  have  been  made  necessary  by  the  transition  from  the 

cooperation procedure to the codecision procedure under Article  189b of the Treaty. 

12th recital 

The  Directive  on  deposit-guarantee  schemes  (Directive  94/19/EC)  having  been 

adopted  by  Parliament  and  the Council  on  30 May  1994, the official  title,  reference 

number,  date  and  publication  details  can  now  be  added  here.  Appropriate 

adjustments  to  subsequent  references  to  Directive  94/19/EC  have  been  made 

accordingly. 

15th recital 

It  is now  specified  that  it  should  not  be necessary  for  a credit  institution  providing 

investment  services  to  belong  to  two  different  schemes  -  under  this  directive  and 

under Directive 94/19/EC - provided that a single scheme meets the requirements of 

both  directives.  This  clarification  which  reflects  the  Commission's  intention  from 

the  outset,  corresponds  to  a  wish  voiced  by  the  Economic  and  Social  Committee, 

although  the  Committee  sought  this  clarification  in  the  text  of  the  corresponding 

article. 

18th and  19th recitals 

These  have  been  adapted  to  make  specific  reference  to  the  proposed  minimum 

compensation  level  of  ECU  20 000 and to  indicate that  this  same  amount  has  been 

fixed  by  Parliament  and  the  Council  in  Directive  94/19/EC  as  the  harmonized 

Community  minimum level for deposit-guarantee  schemes. 

21 st recital 

This clause, dealing with the possibility open to branches to top up their home State 

level  of  compensation  to  the  (higher)  level  available  in  the  host  State  has  been 

aligned on the corresponding clause in Directive 94/19/EC. 

26th recital 

This clause, which deals with the regime applicable to branches of investment  firms 

having  their  head  office  in  a  non-member  country  has  been  brought  into  line, 

mutatis mutandis, with the corresponding recital in Directive 94/19/EC; 

27th recital 

A  new  27th  recital  has  been  added  in  line  with  a  similar  clause  in  Directive 

94/19/EC.  This  deals  with  the  question  of  the  financing  of  compensation  schemes. 

The proposal  does not  lay down any detailed  rules but establishes  the principle  that 

investment  firms  should  finance  the schemes themselves, subject  to the proviso  that 

the  burden  of  financing  investor  compensation  payments  resulting  from  the  failure 

of investment firms should not endanger the stability of otherwise healthy  firms. 

This  point  was  raised  in  the  Opinion  of  the  Economic  and  Social  Committee 

although the Committee sought a reference  in the body of the directive rather than in 

the preamble. 

Article  1(1) 

This 

revised  definition  of  "Investment 

firm"  corresponds 

to  Parliament's 

Amendment  No  1 which  was  accepted  by  the  Commission.  Parliament  wished  to 

make  clear  that  the  concept  of  investment  firm  had  already  been  defined  in  the 

Investment Services Directive. 

Article  1(5) 

In its Amendment No  3, which was accepted  by the Commission,  Parliament  called 

for  the  same  definition  of  "branch"  to  be  included  in  the  investor  compensation 

scheme proposal as was included in the Investment  Services Directive. 

Article  1(6) 

A  definition  of  "joint  investment"  has  been  included.  Although  the  Commission's 

original  proposal  referred  to  "joint  investment  account"  this  concept  was  not 

defined.  The  new  definition  is based  in part  on  the  definition  of  "joint  account"  in 

Directive 94/19/EC. 

Article 2 

Paragraph 1 

This  paragraph  has  been  aligned  to  some  extent  on  Directive  94/19/EC.  In 

particular, 

the  Commission  had  accepted 

the  spirit  of  Parliament's 

Amendment  No  4,  namely  that  it  should  be  clear  that  authorization  was 

based on the principle of home country control. 

There  are now two possible  situations  in which  an  investment  firm  may  not 

belong  to  an  investor  compensation  scheme.  These  are  firstly  where  the 

investment  firm  is  a credit  institution  which  belongs  to  a  system,  based  on 

solidarity, whereby the credit institution will not be allowed to fail.  Since the 

intervention  of  an  investor  compensation  scheme  can  only  be  triggered  by 

the  failure  of  an  investment  firm  the  fact  that  a  credit  institution  doing 

investment business belongs to a system meeting the requirements  of Article 

3(1)  of  Directive  94/19/EC  is  sufficient  to justify  exemption  also  from  the 

obligation to belong to an investor compensation scheme. 

The second  case where  it is possible  for  an investment  firm  not to belong  to 

a compensation  scheme is described in the comments on Article 5. 

Paragraph 2 

This paragraph  has also been  amended  to  reflect  more  closely  the  provisions 

of  Directive  94/19/EC.  The  underlying  principle  that  the  intervention  of  the 

scheme is triggered  by a decision  of the competent  authorities or of a judicial 

authority is unchanged. 

Similarly, although the three  indents  setting  out  the types  of claim  have been 

reduced to two, the same cases are covered. 

In  its  amendment  No  5 Parliament  asked  for  the  words  "or  managed"  to  be 

added.  The Commission  accepted  this  amendment  which  is logical  given  that 

the  service  of  discretionary  portfolio  management  is  one  of  the  services 

falling within the definition  of "investment business" in Article 1. 

Paragraph 4 

The  Commission's  original  proposal  provided  for  two  possible  moments  for 

determination  of  the  amount  of  the  investor's  claim.  For  the  sake  of 

simplicity, and in line with the wishes of the Economic and  Social Committee, 

the  amended  proposal  refers  solely  to  the  moment  of  the  official  decision 

referred  to  in  paragraph  2.  The  reference  to  the  "legal  and  contractual 

conditions  including  those  relating  to  set-off  and  counterclaim  "  reflects 

similar references  in Directive 94/19/EC. 

Article 3 

In  its  opinion  the  Economic  and  Social  Committee  had  requested  that  reference  be 

made to Directive 91/308/EEC on money laundering. The Commission agrees that an 

article  along  the  lines  of  Article  2,  third  indent  of  Directive  94/19/EC  is  indeed 

appropriate. 

Article 4 (former  Article 3) 

No substantive change has been made to this article, although certain minor  drafting 

amendments have been made. 

Article 5 

Article  5  of  the  Commission's  initial  proposal  dealt  with  two  situations,  namely 

where  an  investment  firm  fails  to  comply  with  the  obligations  resulting  from  its 

membership of its home State investor compensation  scheme and, secondly, where a 

branch availing itself of the option to join a host-State scheme on a top-up basis  fails 

to respect the obligations of that optional membership. 

These provisions have been reorganized  in the amended proposal. 

All  of  the  provisions  relating  to  the  top-up  arrangements  have  now  been  brought 

together under the new Article 7. 

The  new  amended  Article  5  now  deals  solely  with  the  first  of  the  two  situations 

outlined  above. These new provisions have been very largely aligned  on Article 3 of 

Directive  94/19/EC.  It  was  clear  to  the  Commission  that  similar  considerations 

applied in the context of the two directives. 

Thus  it  should  be  possible  for  an  investment  firm  ultimately  to  be  expelled  from  a 

compensation  scheme  if  that  firm  does  not  fulfil  its  obligations.  However,  such 

exclusion  should  not  take  place  without  the  express  consent  of  the  competent 

authorities  which  issued  the  authorization.  In  addition  Member  States  should  be 

given the option of allowing an investment firm in this situation to make  alternative 

arrangements providing investors with equivalent coverage. 

The new text is in line with the spirit of Parliament's Amendment No 6. 

Article 6 (new) 

This new article corresponds to Article 5 of Directive 94/19/EC. 

It  may  happen  that  a  firm's  authorization  is  withdrawn  without  its  failure  having 

been  established.  Continued  coverage  by  the  compensation  scheme  is  required  in 

case  it  should  subsequently  transpire  that  the  firm  was  unable  to  meet  its 

commitments to investors. 

Article 7 

The  provisions  dealing  with  the  possibility  open  to  a  branch  to join  a  host-State 

scheme  to  raise  (top-up)  its  home  State  cover  to  the  higher  level  prevailing  in  the 

host-State were previously set out in Article 4 of the Commission's  initial proposal. 

Given  that  the  whole  question  of top-up  had  given  rise  to  extensive  discussions  in 

the  context  of  Directive  94/19/EC  the  Commission  has  preferred  to  align  as  far  as 

possible  the  corresponding  provisions  of  its  amended  investor  compensation 

proposal  on  the  text  finally  agreed  by  Parliament  and  the  Council  in  the  deposit-

guarantee Directive. 

These provisions therefore  include the procedure to be followed  when a branch does 

not  comply  with  the  obligations  resulting  from  its  top-up  membership  of  the  host 

State scheme. 

In  addition  a  set  of  guiding  principles  has  been  included  as  Annex  II  modelled 

closely  on those  in Annex  II to Directive  94/19/EC. The inclusion of such an  annex 

had been proposed in the report of the Economic and Social Committee. 

Article 8 

Paragraph  1 now  refers  to the  aggregate  claim  rather  than  to  the  amount  of  money 

and instruments. This is more accurate. 

Paragraph 2 relates to joint  investment rather than joint account since it is not certain 

that each investor will formally  hold an account as such. 

The  provisions  covering joint  investments  by  business  partnerships,  etc.  and  those 

concerning  investors  who  are  not  absolutely  entitled  to  the  sums  or  securities  held 

are  based  closely  on  the  corresponding  provisions  in  Article  8  of  Directive 

94/19/EC. 

Article 9 

Although  the  substance  of  Article  7  of  the  Commission's  initial  proposal  has  not 

been  altered  the  presentation  has  been  amended  to  make  the  intention  clearer. 

Clearly  investors  have  to  be  made  aware  of  the  decision  referred  to  in  Article  2(2) 

and a provision to this end has been added. 

Article 10 

The former  Article 8 dealing with investor information  has been aligned on Article 9 

of  Directive  94/19/EC.  The  substance  of  the  provisions  remains  unchanged, 

however. 

Article 11 

The  former  Article  9  of  the  Commission's  initial  proposal,  dealing  with  the 

Community  branches  of  investment  firms  which  have  their  head  office  outside  the 

Community, has been aligned on the corresponding Article 6 of Directive 94/19/EC. 

10 

Article 12 

This  article  (the  former  Article  10)  dealing  with  subrogation  is  unchanged  except 

that the text now refers  more correctly to the compensation  scheme having the right 

of subrogation. 

Article 13 

Initially the Commission  had proposed  in the former  Article  11 that  it should  report 

to the Council on the operation of the Direction after five years. 

Parliament's  Amendment  No  7 requested  that  the  report  be  made  to  Parliament  as 

well as the Council after three years. 

The  Commission  accepted  this  amendment  and  the  text  has  been  amended 

accordingly. 

Article 14 

The  Commission's  initial  proposal  (Article  12) had  envisaged  that  the  Directive  on 

investor  compensation  schemes  should  enter  into  force  on  1 January  1996.  This 

reflected  the  wishes  of  the  Council,  as  set  out  in  Article  12  of  the  Investment 

Services Directive. 

That date now  seems  unrealistic  and the text has been  amended  to  require  Member 

States to comply with the Directive by the end of  1996. 

Article 15 

A  new  article  has  been  added  to  formally  repeal  Article  12  of  the  ISD,  which 

introduced  an  interim  investor  information  regime  pending  the  adoption  of  a 

directive  on  investor  compensation  schemes.  The  said  Article  12  will  cease  to  be 

appropriate  or  applicable  as  from  the  entry  into  force  of  the  specific  directive  on 

investor compensation schemes. 

11 

ANNEX I 

This  annex  lists  the  categories  of  investor  which  Member  States  may  decide  to 

exclude from  coverage by the investor-compensation  scheme. 

In item No  1 a number  of categories  have been grouped  together  under the  heading 

of "institutional  investors". 

The  amended  proposal  adds  the  category  (new  No  2)  of  "professional  investors". 

This reflects  a wish expressed  by the Economic and Social  Committee and is in line 

with  the  Investment  Services  Directive,  which  in  a number  of  areas  recognizes  the 

different  need for protection of professional  and institutional  investors. 

In item No 3 the category of "supranational authorities" has been added. 

As  regards  item  No  8  (former  No  13)  the  text  has  been  reformulated  rather  than 

following  the  corresponding  item  in  Directive  94/19/EC,  which  is  not  easily 

transposable to the investment services sector. 

ANNEX II 

See comments on Article 7. 

12 

Amended proposal for a European Parliament and 

Council Directive 

on investor compensation  schemes 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN 

UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 

Article 57(2) thereof, 

Having regard to the proposal from the Commission1, 

Having regard to the opinion of the Economic and Social Committee2, 

Acting in accordance with the procedure referred  to in Article  189b of the Treaty3, 

1.  Whereas  on  10 May  1993  the  Council  adopted  Directive  93/22/EEC  on  investment 

services  in  the  securities  field4,  hereinafter  referred  to  as  "the  Investment  Services 

Directive"; whereas that Directive  is an essential  measure  for  the achievement  of the 

internal market for investment firms; 

2.  Whereas the Investment  Services Directive secures the essential harmonization that is 

necessary  to  secure  the  mutual  recognition  of  authorization  and  of  prudential 

supervision  systems,  making  possible  the  grant  of  a  single  authorization  valid 

throughout  the  Community  and  the  application  of  the  principle  of  home  Member 

State  supervision;  whereas,  by  virtue  of  mutual  recognition,  investment  firms 

authorized  in  their  home  Member  States  may  carry  on  any  or  all  of  the  services 

covered  by  the  Investment  Services  Directive  for  which  they  have  received 

1  O J N o C 3 2 1,  27.11.1993, p.15 

2 

3 

4  O J N oL  141, 11.6.1993, p. 27 

authorization  throughout  the  Community  by  establishing  branches  or  under  the 

freedom  to provide services; 

3.  Whereas  the  protection  of  investors  and  the  maintenance  of  confidence  in  the 

financial  system  is an important aspect of the completion of the internal market  in this 

area; 

4.  Whereas  the  Investment  Services  Directive  provides  for  prudential  rules  which 

investment firms must observe at all times, including rules the purpose of which  is to 

protect  as  far  as  possible  investors'  rights  in  respect  of  money  or  instruments 

belonging to them; 

5.  Whereas,  however,  no  system  of  supervision  can  provide  a  complete  safeguard, 

particularly where acts of fraud  are committed; 

6.  Whereas  it  is  therefore  important  that  each  Member  State  should  have  an  investor 

compensation  scheme  providing  a  minimum  level  of  compensation  at  least  to  the 

smaller  investor  in the event that  an investment firm is unable to meet  its  obligations 

to its investor clients; whereas such is not the case at present; 

7.  Whereas  the  Commission's  initial  proposal  for  an  investment  services  directive5 

included  in the list in Article 9 of prudential  rules to be observed  by investment  firms 

and  to  be  supervised  by  the  home  Member  State's  authorities  membership  of  a 

general  compensation  scheme 

to  protect 

investors;  whereas,  however, 

the 

Commission  proposed that, pending  further  harmonization  of compensation  schemes, 

branches  should  be  subject  to the compensation  scheme  in  force  in the host  Member 

State; 

8.  Whereas, however, this interim  solution was rejected  by the Member  States in  favour 

of a full  home  country  approach,  given the responsibility  of the home  Member  State 

for  issuing the authorization  to  investment firms and  for  their prudential  supervision; 

5  OJ No C 43, 22.2.1989, p. 7 

whereas  it was argued that application  of the home country  control principle  required 

that  the  home  State  compensation  scheme  should  cover  the  activities  carried  on  in 

host Member States, through branches or via freedom  to provide services; 

9.  Whereas  it  was  the  general  view  that  the  complex  issues  raised  by  the  subject  of 

investor  compensation  schemes  could  be  adequately  dealt  with  only  in  a  separate 

proposal for a directive; whereas Article  12 of the Investment  Services Directive does 

not  require  Member  States  to  have  an  investor  compensation  scheme  but  merely 

requires  that  investors  be  informed  of  the  compensation  arrangements  available,  if 

any;  whereas  the  Commission  stated  that  it  would  submit  proposals  on  the 

harmonization of compensation  systems covering transactions by investment firms by 

31 July  1993 at the latest; 

10. Whereas  the  proper  functioning  of  the  internal  market  requires  a  degree  of 

coordination  in this  area  so that  the  small  investor  can  purchase  investment  services 

from  branches  of  Community  investment  firms  or  on  a  cross-frontier  basis  as 

confidently  as  from  domestic  investment  firms,  in the  knowledge  that  a  Community 

minimum  level  of compensation  would be available  in the event  of the  failure  of the 

investment  firm  and  its  subsequent  inability  to  return  the  investor's  money  or 

securities; 

11. Whereas  in  the  absence  of  such  coordination  host  Member  States  may  consider 

themselves justified  for reasons of investor protection  in requiring membership  of the 

host  State compensation  arrangements when a Community  investment  firm  operating 

via  a  branch  or  via  freedom  to  provide  services  either  belongs  to  no  investor 

compensation  scheme in its home Member  State or belongs to a scheme which  is not 

considered  to offer  equivalent  protection; whereas any such requirement  might  create 

serious difficulties  for the operation of the single market; 

IJ 

12. Whereas  European  Parliament  and  Council  Directive  94/19/EC  of  30  May  1994  on 

deposit-guarantee  schemes6 introduced  minimum  harmonization  of  deposit-guarantee 

arrangements  for  credit  institutions;  whereas  credit  institutions  may  in  certain  areas 

be in competition with specialist investment firms; 

13. Whereas  although  most  Member  States  currently  have  some  investor  compensation 

arrangements  the vast majority  do not have arrangements  corresponding  to the  scope 

of the Investment  Services Directive; 

14. Whereas  therefore  all  the  Member  States  should  be  required  to  have  an  investor 

compensation  scheme,  or  schemes,  to  which  all  investment  firms  holding  the  single 

licence  under  the  Investment  Services  Directive  should  belong;  whereas  the  scheme 

should  cover  money  or  instruments  which  are  held  by  the  investment  firm  in 

connection  with  the conduct  of investment  business  and  which,  following  the  failure 

of the firm, cannot be returned to the investor. 

15. Whereas  the  definition  of  investment  firm  includes  credit  institutions  which  are 

authorized  to  provide  investment  services;  whereas  such  credit  institutions  should 

also  be required  to participate  in an investor compensation  scheme  in respect of their 

investment  business;  whereas,  however,  it  should  not  be  necessary  for  such  credit 

institutions  to  belong  to  two  separate  schemes  where  a  single  scheme  meets  the 

requirements  both  of this  Directive  and of Directive  94/19/EC; whereas, however,  in 

the  case  of  investment  firms  which  are  credit  institutions  it  may  in  certain  cases  be 

difficult  to  distinguish  between  deposits  covered  under  Directive  94/19/EC  and 

money held  in connection  with the conduct of investment  business; whereas  Member 

States  should  be  given  the  possibility  of  themselves  determining  under  which 

Directive such claims should  fall; 

16. Whereas  Directive  94/19/EC  allows  Member  States  to  dispense  a  credit  institution 

from  the  obligation  to  belong  to  a  deposit-guarantee  scheme  where  that  credit 

6  OJNoL  135, 31.5.1994, p. 5 

institution  belongs  to  a  system  which  protects  the  credit  institution  itself  and,  in 

particular,  ensures  its  solvency;  whereas,  where  such  a  credit  institution  is  also  an 

investment  firm,  Member  States  should  also  be  authorized  to  dispense  it  from  the 

obligation to belong to an investor compensation scheme; 

17. Whereas  the  cost  of  investor  protection  has  to  be  met  by  investment  firms  but  is 

ultimately  passed  on to the  investor;  whereas therefore  it  is undesirable  to  introduce 

throughout  the  Community  a  very  high  level  of  protection;  whereas  in  addition  to 

encourage  the  investor  to  take  due  care  in  the  choice  of  an  investment  firm  it  is 

reasonable to allow Member  States to require the investor to bear a proportion  of any 

loss;  whereas,  however,  the  investor  should  be  covered  for  at  least  90%  of  his  loss 

until the compensation payment reaches the Community  minimum; 

18. Whereas,  however,  a  harmonized  minimum  level  of  compensation  should  be 

sufficient  to protect the interests  of the  smaller  investor  in the event  of the  failure  of 

an  investment  firm;  whereas  it  would  appear  reasonable  to  set  the  harmonized 

minimum guarantee level at ECU 20 000; 

19. Whereas  this  same  level  was  adopted  by  Parliament  and  the  Council  in  Directive 

94/19/EC; 

20. Whereas the schemes of certain Member  States currently  offer  higher levels of  cover, 

whereas, however,  it does not  seem appropriate  to require that those  schemes  should 

reduce the cover they  offer; 

21.  Whereas  the  retention  in  the  Community  of  schemes  providing  cover  for  investors 

which is higher than the harmonized minimum may, within the same territory, lead to 

disparities  in  compensation  and  unequal  conditions  of  competition  between  national 

investment firms and branches of firms from  other  Member  States; whereas, in order 

to  counteract  those  disadvantages,  branches  should  be  authorized  to join  their  host 

countries'  schemes  so  that  they  can  offer  their  investors  the  same  coverage  as  is 

offered  by  the  schemes  of the  countries  in  which  they  are  located;  whereas  it  is  not 

"1"-} 

ruled  out 

that  home  Member  State  schemes  should 

themselves  offer  such 

complementary  cover, subject to the conditions such schemes may lay down; 

22. Whereas the objective  of this Directive is to ensure a minimum  level of protection  for 

small  investors, including  small and medium-sized  enterprises, who  have the  greatest 

need  of  protection;  whereas,  however,  Member  States  should  be  allowed  to  exclude 

from  coverage  certain  other  categories  of  investors  who  have  a  lesser  need  of  such 

protection. 

23. Whereas  a number  of Member  States  have investor  compensation  schemes  under  the 

responsibility  of  professional  organizations;  whereas  other  schemes  may  be  set  up 

and administered  on a statutory  basis; whereas  this variety  of  status  poses  a problem 

only  with  regard  to  compulsory  membership  of  and  exclusion  from  the  scheme; 

whereas  it  is therefore  necessary  to  take  steps to  limit  the powers  of  schemes  in  this 

area; 

24. Whereas  the  investor  should  receive  compensation  without  excessive  delay  once  he 

has  established  a  valid  claim;  whereas  the  compensation  scheme  itself  should  be 

allowed to fix a reasonable period during which claims should be presented; whereas, 

however,  the  fact  that  such  a  period  has  expired  should  not  be  invoked  against  an 

investor who for a good reason has not been able to present his claim on time; 

25. Whereas  investor  information  on compensation  arrangements  is an  essential  element 

in investor protection  and must therefore  also be the subject  of a minimum number of 

binding provisions; 

26. Whereas  in principle this Directive  requires every  investment firm to join  an  investor 

compensation  scheme;  whereas  the  Directives  governing  the  admission  of  any 

investment firm which has its head office  in a non-member  country, and  in particular 

the  Investment  Services  Directive,  allow  Member  States  to  decide  whether  and 

subject  to what conditions to permit the branches of such investment firms to  operate 

within  their territories;  whereas  such  branches  will  not  enjoy  the  freedom  to  provide 

• i ff 

services  under  the  second  paragraph  of  Article  59  of  the  Treaty,  nor  the  right  of 

establishment  in  Member  States  other  than  those  in  which  they  are  established; 

whereas, accordingly, a Member  State admitting  such branches  should  decide how to 

apply the principles of this Directive to such branches in accordance with Article 5 of 

the Investment  Services Directive and with the need to protect  investors and  maintain 

the  integrity  of  the  financial  system;  whereas  it  is  essential  that  investors  at  such 

branches should be fully  aware of the compensation arrangements which affect  them; 

27. Whereas  it  is  not  indispensable  in  this  Directive  to  harmonize  the  methods  of 

financing  schemes  compensating  investors  given,  on  the  one  hand,  that  the  cost  of 

financing  such  schemes  must  be borne, in principle,  by  investment  firms  themselves 

and,  on  the  other  hand,  that  the  financing  capacity  of  such  schemes  must  be  in 

proportion to their liabilities; whereas this must not, however, jeopardize  the  stability 

of the financial  sector of the Member State concerned; 

28. Whereas 

in  conclusion  a  minimum  harmonization  of 

investor  compensation 

arrangements  appears  necessary  in  order  to  complete  the  internal  market  for 

investment  firms  by  giving  investors  confidence  to  deal  with  firms  from  other 

Member  States  as well  as  locally  incorporated  firms  and  by  avoiding  the  difficulties 

that  might  arise  from  the  application  by  host  Member  States  of  their  uncoordinated 

domestic investor protection requirements; whereas a binding Community  directive is 

the only  suitable instrument to achieve the desired objective  in the general  absence of 

investor compensation  arrangements corresponding to the coverage of the  Investment 

Services  Directive;  whereas 

this  measure 

restricts 

itself 

to 

the  minimum 

harmonization  that  is  required,  allows  Member  States  freedom  to  provide  wider  or 

higher  coverage  if they  desire  and  also  allows  Member  States  considerable  freedom 

as regards the organization and financing  of investor compensation  schemes, 

HAVE ADOPTED THIS DIRECTIVE : 

4  9 

Article J 

For the purposes of this Directive the following  definitions  shall apply : 

1.  "Investment  firm"  shall  mean  an  investment  firm  as  defined  in  Article  1(2)  of  the 

Investment  Services  Directive  and  authorized  in  accordance  with  Article  3  of  the 

Investment  Services  Directive,  or  a  credit  institution  the  authorization  of  which, 

under  Directives  77/780/EEC7  and  89/646/EEC8,  covers  one  or  more  of  the 

investment  services  listed  in  Section  A  of  the  Annex  to  the  Investment  Services 

Directive; 

2.  "Investment  business" shall  mean  an  investment  service  as defined  in Article  1(1) of 

the  Investment  Services  Directive  and the  service  referred  to  in point  1 of  Section  C 

of the Annex to the Investment  Services Directive; 

3.  "Instruments"  shall  mean  the  instruments  listed  in  Section  B  of  the  Annex  to  the 

Investment  Services Directive; 

4.  "Investor"  shall  mean  a  person  who  has  entrusted  money  or  instruments  to  an 

investment firm in connection with investment business; 

5.  "Branch"  shall mean a place of business which  is a part of an investment  firm,  which 

has  no  legal  personality  and  which  provides  investment  services  for  which  the 

investment  firm  has  been  authorized;  all  the  places  of  business  set  up  in  the  same 

Member State by an investment firm with headquarters in another Member  State shall 

be regarded as a single branch; 

6.  "Joint  investment"  shall  mean  an  investment  made  in  the  context  of  investment 

business,  or  money  placed  with  an  investment  firm  for  investment  business,  in  the 

names  of  two  or  more  persons  or  over  which  two  or  more  persons  have  rights  that 

may operate against the signature of one or more of those persons. 

7  OJ No L 322,  17.12.1977, p. 30. 

8  OJ No L 386, 30.12.1989, p. 1. 

ec o 

Article 2 

1.  Each  Member  State  shall  ensure  that  within  its  territory  one  or  more  investor 

compensation  schemes  are  established  and  officially  recognized.  Except  in  the 

circumstances  envisaged  in  the  second  subparagraph  and  in  Article  5 no  investment 

firm  authorized  in  that  Member  State  may  carry  on  investment  business  unless  it 

participates in such a scheme. 

A  Member  State  may,  however,  exempt  a  credit  institution  to  which  this  Directive 

applies, from  the obligation to belong to an investor compensation  scheme where that 

credit  institution  is  already  exempted  in  accordance  with  Article  3(1)  of  Directive 

94/19/EC from  belonging to a deposit guarantee scheme. 

2.  The  scheme  shall  provide  cover  to  investors  in  accordance  with  Article  4  where 

either: 

(i) 

the  relevant  competent  authorities  have  determined  that  in  their  view  an 

investment  firm  appears  to  be  unable  for  the  time  being,  for  reasons  which 

are  directly  related  to  its  financial  circumstances,  to  meet  its  obligations 

resulting from  investors' claims; or 

(ii) 

a judicial  authority  has  made  a ruling  for  reasons  which  are  directly  related 

to  an  investment  firm's  financial  circumstances  which  has  the  effect  of 

suspending investors' ability to make claims against it; 

whichever is the earlier. 

Cover must  be provided  for  claims resulting  from  the inability  of an investment  firm 
to : 

—repay money  owed to investors or belonging to investors  and held  on their  behalf 

in connection with investment business, or 

—return  to  investors  any  instruments  belonging  to  them  and  physically  held, 
administered  or managed on their behalf in connection with investment business. 

in accordance with the legal and contractual conditions applicable. 

2n 

3. Any  claim  under  paragraph  2 on a credit  institution  which,  in a Member  State,  would 

be  subject  to  this  Directive  and  Directive  94/19/EC  shall  be  allocated  to  a  scheme 

under one or other of these Directives as that State shall consider appropriate. No claim 

in respect of the same amount shall be eligible for compensation under both Directives. 

4. The  amount  of  an  investor's  claim  shall  be  calculated  according  to  the  legal  and 

contractual  conditions, including those relating to set-off  and counterclaims  applicable 

to  the  claim  on  the  basis  of  the  amount  of  money  or  the  value  of  the  instruments 

belonging  to the investor which the  investment firm is unable to repay  or return  at the 

time of the decision referred  to in paragraph 2. 

Article 3 

Claims  relating  to  transactions  in  connection  with  which  there  has  been  a  criminal 

conviction  for money laundering as defined  in Article  1  of Council  Directive  91/308/EEC 

of  10  June  1991  on  prevention  of  the  use  of  the  financial  system  for  the  purpose  of 

money 

laundering9,  shall  be  excluded 

from  any  compensation 

from 

investor 

compensation  schemes. 

Article 4 

1. Member  States  shall  ensure  that  the  scheme  provides  for  coverage  of  not  less  than 

ECU 20 000 per investor in respect of the claims referred  to in Article 2(2). 

2. Member  States may provide that certain investors shall be excluded  from  the  coverage 

of the scheme or shall be granted a lower level of coverage. Those exclusions are listed 

in Annex I. 

3. This  Article  shall  not  preclude  the  retention  or  adoption  of  provisions  which  offer  a 

higher or more comprehensive cover for investors. 

9  OJ No L  166, 28.6.1991, p. 77. 

4. Member  States  may  limit  the  cover  provided  for  in paragraph  1 or  that  referred  to  in 

paragraph  3 to a specified  percentage  of the  investor's claim. However,  the  percentage 

covered must be equal to or exceed 90% of the claim until the amount to be paid  under 

the scheme reaches ECU 20 000. 

Article 5 

1. If an investment firm required by Article 2(1) to take part in a scheme does not comply 

with the obligations incumbent on it as a member of an investor compensation  scheme, 

the  competent  authorities  which  issued  the  authorization  shall  be  notified  and,  in 

collaboration  with  the  compensation  scheme,  shall  take  all  appropriate  measures, 

including the imposition of sanctions, to ensure that the investment firm complies with 

its obligations. 

2. If  those  measures  fail  to  secure  compliance  on  the  part  of  the  investment  firm,  the 

scheme  may, where  national  law permits the exclusion  of a member,  with the  express 

consent  of  the  competent  authorities,  give  not  less  than  twelve  months'  notice  of  its 

intention  of excluding  the  investment firm from  membership  of the  scheme. If,  on the 

expiry  of the notice period,  the investment firm has not complied  with its obligations, 

the  compensation  scheme  may,  again  having  obtained  the  express  consent  of  the 

competent authorities, proceed to exclusion. 

3. Where national  law permits, and with the express consent  of the competent  authorities 

which  issued  its  authorization,  an  investment  firm  excluded  from  an  investor 

compensation  scheme  may  continue  its  activities  if,  before  its  exclusion,  it  has  made 

alternative  compensation  arrangements  which ensure that investors will benefit  from  a 

coverage at least equivalent to that offered  by the officially  recognized  scheme. 

4. If an  investment  firm  the  exclusion  of which  is proposed  under  paragraph  2 is  unable 

to  make  alternative  arrangements  which  comply  with  the  conditions  prescribed  in 

?  3 

paragraph  3, then the competent  authorities which issued  its authorization  shall  revoke 

if  forthwith. 

Article 6 

Investors  with  an  investment firm when the authorization  is withdrawn  shall  continue  to 

be covered  by the investor compensation  scheme. 

Article 7 

1. Investor  compensation  schemes  established  and  officially  recognized  in  a  member 

State  in  accordance  with  Article  2(1)  shall  cover  the  investors  at  branches  set  up  by 

investment firms in other Member States. 

Where  the  level  and/or  scope,  including  the  percentage  of  cover  offered  by  the  host 

member  State  investor  compensation  scheme  exceeds  the  level  and/or  scope  of  cover 

provided  in  the  Member  State  in  which  an  investment  firm  is  authorized,  the  host 

Member  State  shall  ensure  that  there  is  an  officially  recognized  scheme  within  its 

territory  which  a  branch  may  join  voluntarily  in  order  to  supplement  the  guarantee 

which  its  investors  already  enjoy  by  virtue  of  its  membership  of  its  home  Member 

State scheme. 

The  scheme to be joined  by the branch shall cover the category  of institution  to  which 

it belongs or most closely corresponds in the host Member State. 

Member  States  shall  ensure  that  objective  conditions  relating  to  the  membership  of 

these  branches  form  part  of  all  investor  compensation  schemes.  Admission  shall  be 

conditional  on  fulfilment  of  the  relevant  obligations  of  membership  including  in 

particular  payment  of  any  contribution  and other  charges. Member  States  shall  follow 

the guiding principles set out in Annex II in implementing this paragraph. 

2  M 

2. If a branch granted voluntary membership under paragraph  1  does not comply  with the 

obligations  incumbent  on  it  as  a  member  of  an  investor  compensation  scheme,  the 

competent  authorities  which  issued  the  authorization  shall  be  notified  and,  in 

collaboration  with  the  compensation  scheme,  shall  take  all  appropriate  measures  to 

ensure that the aforementioned  obligations are complied with. 

If  those  measures  fail  to  secure  the  branch's  compliance  with  the  aforementioned 

obligations,  after  an  appropriate  period  of  notice  of  not  less  than  twelve  months  the 

compensation  scheme may, with the consent of the competent authorities which issued 

the authorization, exclude the branch. Investors shall be informed  of the withdrawal  of 

the supplementary  cover. 

Article  8 

1. The coverage referred  in in Article 4(1), (3) and  (4) shall  apply to the aggregate  claim 

of  the  investor  under  this  Directive  irrespective  of  the  number  of  accounts,  the 

currency and the location within the Community. 

2. The  share  of  each  investor  in  a  joint  investment  shall  be  taken  into  account  in 

calculating the coverage provided for in Article 4(1), (3) and (4). 

In the absence of special provisions the compensation shall be divided equally between 

the investors in the joint  investment. 

Member  States may provide that claims relating to a joint  investment  to which  two or 

more  persons  are  entitled  as  members  of  a  business  partnership,  association  or 

grouping  of a similar nature, without  legal personality,  may  be aggregated  and  treated 

as if made by a single investor  for the purpose of calculating the limits provided  for  in 

Article 4(1), (3) and (4). 

3. Where the  investor  is not absolutely  entitled to the sums or  securities held, the  person 

who is absolutely  entitled  shall receive the compensation  provided  that that person has 

been  identified  or is identifiable  before  the date referred  to in Article  2(2). If there  are 

several  persons  who  are  absolutely  entitled,  the  share  of  each  under  the  arrangements 

subject  to  which  the  sums  or  the  securities  are  managed  shall  be  taken  into  account 

when the limits provided  for in Article 4(1), (3) and (4) are calculated. 

This provision  shall not apply to collective investment  undertakings. 

Article 9 

1. The  compensation  scheme  shall  take  appropriate  measures  to  inform  investors  of  the 

decision referred  to in Article 2(2) and shall be allowed to fix a period  or not less than 

six months during which investors may be required to submit their claims. 

However,  the  expiry  of  such  a period  may  not  be  invoked  by  the  scheme  in  order  to 

deny  compensation  to  an  investor  who  has  been  unable  to  assert  his  claim  under  the 

compensation  scheme in time. 

2. The  scheme  shall  pay  investors'  claims  as  soon  as  possible  and  at  the  latest  three 

months after  the eligibility and the amount of the claim have been established. 

Article 10 

1. Member  States shall ensure that investment firms take appropriate measures to provide 

actual  and  intending  investors  with the  information  necessary  for  the  identification  of 

the  investor  compensation  scheme  of  which  the  investment  firm  and  its  branches  are 

members within the Community  or any alternative arrangement provided  for in Article 

2(1)  second  subparagraph  or  Article  5(3).  The  investors  shall  be  informed  of  the 

provisions  of  the  investor  compensation  scheme  or  any  alternative  arrangement 

applicable,  including  the  amount  and  scope of the  cover  offered  by the  compensation 

scheme. That information  shall be made available in a readily comprehensible  manner. 

Information  shall  also  be  given  on request  on the  conditions  governing  compensation 

and the formalities  which must be fulfilled  in order to obtain  compensation. 

2.Q 

2. The  information  referred  to  in  paragraph  1  shall  be  made  available  in  the  manner 

provided  by national  law in the official  language or languages of the Member  State  in 

which a branch is established. 

Article 11 

1. Member  States shall  check that branches established  by an investment  firm  which  has 

its head office  outside the Community  have cover  equivalent  to that prescribed  in this 

Directive.  Failing  that,  Member  States  may,  subject  to  Article  5  of  the  Investment 

Services Directive, stipulate that branches established by an investment firm which has 

its  head  office  outside  the  Community  must joint  investor  compensation  schemes  in 

operation within their territories. 

2. Actual  and  intending  investors  at  branches  established  by  an  investment  firm  which 

has  its  head  office  outside  the  Community  shall  be  provided  by  the  investment  firm 

with  all  relevant  information  concerning  the  compensation  arrangements  which  cover 

their investments. 

3. The  information  referred  to  in  paragraph  2  shall  be  made  available  in  the  official 

language  or  languages  of  the  Member  State  in which  the  branch  is  established  in  the 

manner prescribed  by  national  law and  shall  be drafted  in a clear  and  compréhensible 

form. 

Article 12 

Without  prejudice  to any  other  rights which  it may  have  under  national  law, an  investor 

compensation  scheme which pays investors' claims shall have the right of subrogation  to 

the rights  of the  investors  in the  liquidation  proceedings  for  an  amount  equivalent  to  its 

payment. 

Z} 

Article  13 

No latter than three years after  the date mentioned  in Article  14(1), the Commission  shall 

present  a  report  to  the  European  Parliament  and  the  Council  on  the  application  of  this 

Directive, accompanied where appropriate by proposals for its revision. 

Article  14 

1. Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 

provisions  necessary  to comply  with this Directive  by  31  December  1996. They  shall 

forthwith  inform  the Commission thereof. 

When  Member  States  adopt  these  measures,  they  shall  contain  a  reference  to  this 

Directive  or  shall  be  accompanied  by  such  reference  on  the  occasion  of  their  official 

publication.  The methods of making  such reference  shall be laid down by the  Member 

States. 

2. Member  States  shall  communicate  to  the  Commission  the  texts  of  the  main  laws, 

regulations  and  administrative  decisions  which they  adopt  in the  field  covered  by  this 

Directive. 

Article 15 

Article  12 of Directive 93/22/EEC shall be repealed as from the date referred  to in Article 

14(1). 

Article 16 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the Parliament, 

The President 

For the Council, 

The President 

?% 

ANNEX  1 

LIST OF THE EXCLUSIONS REFERRED TO IN ARTICLE  4m 

1.  Institutional  investors including : 

—  Investment firms as defined  in Article  1(2) of the Investment Services Directive. 

—  Credit  institutions  as  defined  in  the  first  indent  of  Article  1  of  Directive 

77/780/EEC. 

—  Financial  institutions as defined  in Article  1(6) of Directive  89/646/EEC. 

—  Insurance undertakings. 

—  Collective investment undertakings. 

—  Pension or retirement  funds. 

Other institutional  investors. 

2.  Professional  investors 

3.  Supranational, Government and central administrative authorities. 

4.  Provincial, regional, local or municipal authorities. 

5.  Directors  and  managers  of  and  members  personally  liable  in  the  investment  firm, 

holders  of  at  least  5% of the  capital  of  the  investment  firm,  persons  responsible  for 

carrying  out  the  statutory  audits  of  the  investment  firm's  accounting  documents  and 

investors with similar status in other companies in the same group. 

6.  Close relatives  and  third  parties  acting  on behalf  of the  investors  referred  to  at  point 

5. 

20) 

7.  Other companies in the same group. 

8.  Investors who have any responsibility  for,  or have directly  or indirectly profited  from 

events  relating  to  the  investment  firm  or  its  business  which  gave  rise  to  the  firm's 

financial  difficulties. 

9.  Companies  which  are of  such  a size that they  are not permitted  to draw up  abridged 

balance  sheets  under  Article  11 of the  Fourth  Council  Directive  (78/660/EEC)  of  25 

July  1978  based  on  Article  54(3)(g)  of the  Treaty  on the  annual  accounts  of  certain 

types of companies10. 

10  OJ No L 222,  14.8.1978, p.  11. Directive as last amended by Directive 94/8/EC of 21.3.1994 (OJ No L 

82,25.3.1994, p. 33) 

3 

ANNEX II 

GUIDING  PRINCIPLES 

Where a branch applies to join a host Member State scheme for  supplementary  cover, the 

host Member  State scheme will bilaterally establish with the home Member  State scheme 

appropriate rules and procedures for paying compensation to investors at that branch. The 

following  principles  shall  apply  both  to  the  drawing  up  of  those  procedures  and  in  the 

framing  of  the  membership  conditions  application  to  such  a  branch  (as  referred  to  in 

Article 7(1)): 

a. 

the  host  Member  State  scheme  will  retain  full  rights  to  impose  its  objective  and 

generally  applied rules on participating investment firms; it will be able to require the 

provision  of  relevant  information  and  have  the right  to  verify  such  information  with 

the home Member  State's competent authorities; 

b.  the  host  Member  State  scheme  will  meet  claims  for  supplementary  compensation 

after  it has  been  informed  by the  home  Member  State's  competent  authorities  of  the 

decision  referred  to  in  Article  2(2).  The  host  Member  State  scheme  will  retain  full 

rights  to  verify  an  investor's  entitlement  according  to  its  own  standards  and 

procedures before  paying supplementary  compensation; 

c.  home  Member  State and  host Member  State  schemes will  co-operate  fully  with  each 

other to ensure  investors  receive  compensation  promptly  and  in the  correct  amounts. 

In particular, they  will  agree on how the existence of a counterclaim  which  may  give 

rise to set-off  under either scheme will affect  the compensation paid to the investor by 

each scheme; 

d.  host  Member  State  scheme  will  be  entitled  to  charge  branches  for  supplementary 

cover  on  an  appropriate  basis  which  takes  into  account  the  guarantee  funded  by  the 

home  Member  State  scheme.  To  facilitate  charging,  the  host  Member  State  scheme 

zi 

will  be  entitled  to  assume  that  its  liability  will  in all  circumstances  be  limited  to  the 

excess  of the cover  it has  offered  over  the  cover  offered  by the  home  Member  State 

regardless  of  whether  the  home  Member  State  actually  pays  any  compensation  in 

respect of claims by investors within the host Member State's territory. 

3<e 

C0M(94) 585 final 

DOCUMENTS 

EN 

09 

Catalogue number : CB-CO-94-612-EN-C 

ISBN 92-77-83394-7 

Office for Official  Publications of the European Communities 
L-2985 Luxembourg